Currency forwards and swaps презентация

Lesson objectives
Introduce the concept of currency forwards and FX swaps and currency swaps
Review the mechanics of those contracts.
Create synthetic instruments for currency forwards.
Evaluate cash flows.

Introduction
Financial instruments can be denominated in different currencies.
Financial markets offer wide variety of liquid financial instruments denominated in USD .
However, the range of liquid financial instruments denominated in such currencies as Swiss francs or Swedish crones is relatively small.
Foreign exchange forward and swap contracts make USD denominated financial instruments available to market participants trading in other currencies.

Currency forwards definition
Foreign currency forwards are used as a foreign currency hedge when an investor has obligation to pay or receive foreign currency at some point in the future.
The currency forward represents a binding contract in foreign exchange market which fixes the exchange rate for sale or purchase of currency on a future date.
Currency forwards also known as outright forwards are over-the-counter financial instruments.

Currency forward contracts

Forward contract cash flows

Creating synthetic for the currency forward

Money market synthetic for the currency forward

Money market synthetic for the currency forward 2

Bonds synthetic for the currency forward

Pricing of forward contracts

Pricing of forward contracts 2
FX forward
USD against EUR
Using proceeds buy USD against EUR

Quoting conventions for FX forwards
Markets quote forward points rather than outright forward rates.
For instance suppose forward EUR/USD quotes are given by :
bid = 1.0210 ask=1.0220
Spot exchange rates are given by:
bid = 1.0202 ask=1.0205
Traders prefer to quote forward points:
bid =8 ask=15

Quoting conventions for FX forwards 2

Foreign exchange swaps
Foreign exchange swap is a contract in which one party borrows one currency from and at the same time lends another currency to second party.
The repayment obligation is used as collateral and the amount of repayment is fixed by the FX forward rate. The FX swap can be considered as riskless collateralized borrowing/lending.
We can also think of foreign exchange swap as if the two counterparties spot purchase and forward sell two currencies against each other.

Foreign exchange swaps 2

Foreign exchange swaps advantages
FX swaps are interbank instruments , not available to clients . Counterparty risk is lower and bid ask spread is smaller.
FX swaps allow to borrow and lend in both currencies without moving prices. With FX swaps traders are not buying and selling deposits but rather exchanging them .
FX swaps are off-balance sheet items and have minor balance sheet effects.

Currency swaps

Currency swaps 2